Troubled age of the ruble: century-old financial recipes will help strengthen the national currency

“The fall of the ruble exchange rate and the possibility of its stabilization”. No, this is not a headline from today’s news years. Why then is the phrase in quotation marks? The fact is that under exactly the same title 101 years ago, in 1922 (!), a conversation with the head of the Market Research Institute, Professor Nikolai Kondratiev, was published in the newspaper Economic Life. Yes, yes, more than a century has passed – the mind is incomprehensible! – and the name is still on the topic of the day today.

Nikolai Dmitrievich Kondratyev – an outstanding Russian, Soviet economist, was repressed and shot in 1938. He is known in the scientific world primarily for his theory of long economic waves. But in fact, when you re-read the works of Kondratiev, you are amazed at how thematically versatile and deep scientist-economist was our famous compatriot. And yes, of course, he was also very worried about the depreciation of the ruble.

Today we are worried about the same thing – about the ruble. Of course, then the situation was somewhat different, Nikolai Kondratiev was primarily worried about the frenzied inflation. The issue of money caused great concern then, when the young Soviet government tried to solve the problem of their shortage with the help of simple printing of banknotes. And the mentioned conversation, which was published under such a relevant title, is about just that. Today, after all, the root of the troubles of the Russian ruble lies not in the issue. At least for now. However, as before, “the question of the possibility and methods of stabilizing the exchange rate of the ruble is one of the most difficult questions, the most difficult not so much for theory, but for the practice of resolving it.” And again, the quotation marks are a direct quote from the work of Nikolai Kondratiev.

So what about the possibility of stabilizing the ruble exchange rate today? After the ruble fell below the level of 101 per US dollar, and the Bank of Russia sharply raised the key rate from 8.5% to 12%, and then information appeared that the authorities, in order to increase the volume of foreign currency sold on the domestic market, could again oblige exporters to sell 80 -90% of foreign exchange earnings, the ruble has strengthened. Today, the main question is whether it has strengthened for a long time.

In general, the situation for many seems similar to the one that was at the end of February – March 2022. Then, too, at first there was a rapid weakening of the ruble, then a sharp increase in the key rate by the Central Bank to 20%, then no less rapid strengthening of the ruble. The situation is really very similar to the one that was a year and a half ago. But I would say this: the situation is the same, but not the same. What is the difference between the current state of affairs with rubles and the one and a half years ago? There is a difference, and it is fundamental.

Then a sharp increase in the key rate by the Bank of Russia, the introduction of a whole range of hard currency restrictions and other measures taken to stabilize the exchange rate of the national currency, laid very well on the fundamental basis of the strengthening ruble – a strong balance of payments. Such a balance has developed because world prices for Russian energy resources, primarily for oil, have risen sharply, while imports have collapsed no less sharply. As a result, there was indeed a lot of currency, its exchange rate against the ruble was declining.

But already from the end of 2022, the situation began to change radically: exports in value terms began to decrease, while imports, on the contrary, began to grow. As a result, the positive balance of foreign trade of the Russian Federation in the first half of 2023 amounted to $57 billion, according to the Bank of Russia, which is 68.3% less than the same indicator in 2022 ($179.8 billion). This is a giant failure. The volume of exports, by the way, for the same first six months of 2023 decreased by 32.5%, to $206.8 billion, while imports increased by 18.3%, to $149.8 billion. Here it is – the fundamental reason for what happened to the ruble until August 15, 2023, when the Bank of Russia raised the key rate to 12%.

The problem, and a big one, is that even after August 15, 2023, when the Bank of Russia sharply raised the key rate, nothing has changed with this very fundamental basis for the weakening of the ruble – Russia’s declining foreign trade balance. And this means that the current situation with an attempt to stabilize and strengthen the ruble exchange rate is fundamentally different from what happened in 2022. At that time, all measures to stabilize the ruble fell well on the fundamental basis for this – the growing balance of payments. Today, similar measures do not have such a basis; today the foundation is different – a weakening balance of payments. This means that all the administrative measures taken and possible in the future have no really serious chances to truly reverse the weakening ruble. Some temporary strengthening of it is possible, but the trend will remain the same – the ruble will weaken. Now, if exports in value terms began to grow rapidly again, then it would be a different matter.

Another conclusion that can be drawn from this whole situation in the foreign exchange market is that solving the problem of devaluation does not really help the ruble. And all because if there is some fundamental reason for a different trend, then it cannot be overcome. This does not mean that devaluation should not take place. Devaluation, understood as a gradual abandonment of the use of the US dollar and the euro, is an inevitable process in the current conditions of strong sanctions pressure. But the impact of this process on the strengthening of the ruble should not be overestimated.

In addition to the above-mentioned serious reasons for the weakening ruble, there are not too advertised reasons why the weak ruble is beneficial to the financial authorities. However, why “not too advertised”? Many observers, even those who are far from economics, already understand that the weaker the ruble, the more ruble revenues to the budget from exporters. In terms of rubles, with the weakening national currency, exporters receive more, so they will pay more taxes (in the same rubles!) To the budget.

The interest of the financial authorities in a weak ruble becomes greater when the budget deficit increases, when there is not enough money in it. Now just from this point of view the situation is not very good. According to the preliminary estimate of the Ministry of Finance of the Russian Federation, the oil and gas revenues of the federal budget, in which the export component is very large, decreased by 41.4% in January-July 2023 compared to the corresponding period in 2022. The federal budget deficit amounted to 2.8 trillion rubles during this period, almost reaching the planned deficit for the whole of 2023 (2.9 trillion rubles). And here I again recall Nikolai Kondratiev, who also drew attention to how disastrous the situation is for the ruble, “as long as the state budget remains deeply in deficit.” I hope that representatives of the financial and economic authorities also understand this very well.

By the way, I noticed that against the background of the current sharp weakening of the ruble, in a number of publications our national currency has again begun to be called “wooden”. Yes, I thought, this has not happened for a long time, a very long time, and now again …

At the time of Nikolai Kondratiev, the ruble was not called “wooden”, although there were good reasons for this. The problems of the falling exchange rate of the ruble then eventually managed to be solved. We succeeded because, in the end, we paid attention to the fundamental reasons for the depreciation of the ruble and avoided issuing unsecured money. Even today, even if the ruble has a different nature of problems, more attention should be paid to what underlies its difficulties. As they say: “Look at the root!” This, of course, is no longer Nikolai Kondratiev. This is Kozma Prutkov. But that doesn’t make it any less relevant…